When I first began writing about the Credit Crunch and its consequences I said that the defining moment in this cycle will come when the decision is made to re-introduce aspects of the pre-Monetarist economic system to a greater or lesser extent.
I argued that the Credit Crunch was not a ‘natural’ crisis in the sense that it arose out of production and trade processes like previous crises in the last century. I described how the Credit Crunch was instead the consequence of the solution implemented to combat inflation and stagnation of the 1970’s. The Credit Crunch was the product of past medicine not contemporary illness.
Monetarism was created to cure the problem of inflation, specifically wage inflation, for once and for all. Effectively, it removed the possibility of workers being able to directly influence the economy through collective wage demands. From now on workers as a group would have to accept whatever was offered by the economy instead of visa versa.
This was achieved by a combination of suppressing trades unions, dismantling of work place legal rights and the introduction of truly large scale mass immigration. These had the effect of permanently altering the supply of labour available.
In tandem with supply side reforms to the labour market Monetarism advocated a move towards a mass credit economy and most crucially the introduction of democratised money through financialisation. This combination of measures in total produced a low-wage, low discretionary spend and low growth economy in the aftermath of the Credit Crunch.
To reiterate the point: In the sense that Monetarism was a planned attack on the post war political and economic settlement, the Credit Crunch that followed from it was entirely voluntary and entirely avoidable.
But if pundits are to be believed all this is to be overturned- or at least corrected to some extent in a kind of counter reformation to Monetarism. We are told that under Donald Trump America, (and Britain under the Brexit regime), will return to the old style ‘great again’ economy .
Inflation will arise from the dead and interest rates will lift in response. We are told that as part of this cycle of cause/effect, real wages will also begin seriously rising after decades of stagnation.
I understand now that my initial analysis of the Credit Crunch was incorrect in that it did not take into account the significance of derivatives and the permanent effect they would have on the global economy. It was only after I began to write about the central bank response to the credit crunch in the form of Quantitive Easing that I realised that derivatives were entirely novel in the effect they would have on structures within developed economies.
Derivatives are a new privately issued form of money. As such, they have colonised sections of global economic activity. As a consequence of this colonisation derivatives permanently distort the total global economy to the extent that they are allowed to operate within it.
The mistake I initially made was not to realise that even if the old world was to some extent allowed to be re-introduced into the new world, it would not be on the same terms as previously. History is one way street. This brings us to the central theme of this piece which is the new shrunken environment into which Donald Trump will birth his new great America.
You will probably have heard of ‘shrinkflation’ in which the packaging of a commodity remains more or less the same but the actual product within the package shrinks. For example look inside a bag of potato crisps and you find it will now be less than a third full- the bag is mostly air. A bar of Toblerone chocolate has famously shrunk to the size of the foothills of Wales instead of the mighty Alps it was supposed to represent.
In terms of commodities, the sound of the future seems to be a ‘capitalist rattle’ where shrunken products jiggle around in their oversized packaging. Something similar has happened in the world of politics producing ‘wiggle room’.
Wiggle room is the phenomena whereby it becomes increasingly difficult to attribute any given outcome to any particular cause. (See what I have written on the ‘Secret Economy’)
I have referred to sawing the lady in half on more than one occasion as a metaphor for the new politics and economics.The key to this trick is understanding that there is a lot more room in the box the lady goes into than you might suppose. The wiggling fingers and the wiggling toes that you can see do not actually belong to the same person inside the box but instead to 2 separate people.
Something a lot like the sawn lady has recently been happening in the world of Anglo-Saxon politics and goes directly to the question of the nature of the new political movement that has given rise to both Brexit and the election of Donald Trump as president of the United States of America.
I have characterised this movement as Anglo Saxon nationalism as distinct from those on the liberal left who regard it as a form of white nationalism with its concomitant implications of racism.
The standard Trumpist retort to accusations of racism has been to argue that the same public that elected Donald Trump is the same public that elected Barack Obama on two occasions previously. If these people were prepared to let Obama rule they can hardly be regarded as being racist –can they?
But this overlooks the fact that there is a large amount of ‘wiggle room’ within the American electorate. Only half the potential voters in America actually bother to turn out for elections generally and of that half, only half again actually voted for Donald Trump. Which means Trump was actually selected by a quarter of the electorate.
Following from this it is entirely possible that both Trump and Obama were actually elected by two more or less entirely separate and different constituencies that have enough spare room within the electorate to hardly overlap at all.
In other words it is entirely possible that the vast majority of those who voted for Trump would never in any circumstances vote for Obama or any other black man. They are in large part an entirely different constituency from the liberals. If you look at the sawn lady’s wiggling fingers and then at her wiggling toes you might start to notice that they are a slightly different colour…
The same is equally true in the case of Brexit. Only around a quarter of the available population actually voted to leave the European Union. So the idea that the leave voters represent a disillusioned previously semi liberal strand of mainstream British society is at least questionable.
This ‘bagginess’, this loose fitting wiggle room system, is one that tends to lend itself to the performance of conjuring acts such as sawing the lady in half. Given that this is the case, it seems hardly remarkable, in fact entirely predictable, that such a system would attract a showman like Donald Trump.
I have described the electoral space that allows Trump and Brexit to rise to prominence. But underlying this there is an economic hollowing out that provides the basis of these political phenomena.
The creation of privately issued democratised money in the form of derivatives effectively gives us an economic version of two magician’s assistants within the same box. The wiggling toes and fingers that you see do not belong to the same body. That is why inflation and deflation, labour participation rates and unemployment, equity and bond prices all seem to be sending conflicting signals that we know simply can’t be possible in the real world.
If money can be described as an information signalling system then two forms of money privately issued and government issued, existing side-by-side and sending out coterminous signals can only result in increasing confusion.
Inflation signals or deflation signals, or growth signals or shrinkage signals are being sent out by either privately issued derivatives economy or the government issued general money economy. It is virtually impossible to say which is which. But the point is that this is not one information system but two systems existing side by side.
I have previously argued that the endpoint of this phase of democratised money will result in roughly half the worlds economy being colonised by derivatives. This is not a general guess, a number of pundits have previously indicated that the long term average interest is expected (required), to be 2 1/2 to 3 % .In consequence, Donald Trump’s claim to make America Great again can only really mean making half of America great again or America half great again.
In a world where half the economy is colonised by democratised money derivatives interest rates can only rise to half their potential maximum. By the same token real inflation can only rise to half its potential maximum. The state sponsored economy can only grow at half its potential rate at maximum. In other words, every and all aspect of the system can only operate and exist at half the previous level if there is only half the economy to operate within.
So when I say that resolution of the credit crunch crisis is dependent upon how much of the old world the elite is prepared to allow to re-emerge, from the perspective of democratised money, the maximum amount that can be allowed to emerge is 50%, if that is indeed the level at which derivatives will be allowed to colonise the world economy.
From this perspective it is possible to make some specific predictions as to the numbers behind Trump’s make America great again strategy.
The long-term average underlying interest rate in the developed economies is around 5%. I have for a long time predicted that the long-term normative interest rate post credit crunch will be 2 1/2 to 3%.
From what I have said it should also follow that the long-term average normative inflation rate will settle at around 1 1/2– 2 % and that the growth in GDP rate and growth in employment rate should also settle at around half their historical real average in the post Credit Crunch world.
But they won’t of course, for the very straightforward reason that they are made up figures…
However there are a number of real life indicators that we can say will be restricted to half their previous level of growth under the half and half economy.
Growth in life expectancy will be cut to half its post war average rate in the developed world.
Growth in home ownership will also be cut to half.
The average fall in the rate of poverty will also fall to half its previous post war average.
So now we know that Donald Trump is going to end up being round about half as frightening as the liberals thought he was going to be..
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